GST cuts vs household debt: Why the middle class can’t spend more

The government has unveiled a bumper bonanza: a simplified two-tier GST structure comprising two slabs of 5% and 18%, in addition to a 40% sin tax on liquor and tobacco. From a fiscal standpoint, the tax reform will cost the exchequer ₹48,000 crore per year, but for an expected private consumption gain. According to estimates, since households spend 75 paise of every additional rupee earned, the multiplier effect is expected to translate into ₹87,400 crore consumption boost.

But here’s the paradox: the salaried Indian middle class isn’t gasping for tax relief. It is gasping for credit relief.

Here’s why:

Over the past decade, personal loans have grown at CAGR of over 17% to more than ₹61 lakh crore (as of July 2025), outpacing the growth in salaries. Corporate India’s wage bill, represented by the cumulative salaries of the combined universe of BSE and NSE 500 companies, has grown at 10% over the same period. In other words, the Indian consumption boost is not backed by higher wages, but by a disproportionate growth in borrowed money.

A deep dive by Fortune India into the numbers reveals an unsettling anatomy of a borrowed desire: every single personal loan category shows that middle class Indian consumer aspires not to own assets, but to accumulate liabilities.

Credit card debt

Nowhere is this more visible than in the credit card statement.

Outstanding card balances have grown at over 25% annually over the past decade. Even more telling is that consumers are pulling out hard cash from ATMs through credit cards at annual interest rates ranging from 39% to 49%. In the past fiscal alone, cash withdrawals through credit cards hit an all-time high over ₹5,000 crore. Over the past decade, cumulative withdrawals have crossed ₹40,000 crore. The current outstanding on credit cards, including purchases and withdrawals, is ₹2.91 lakh crore. Of India’s 111 million credit card users, 25-26% are revolvers, those who pay only the minimum amount due, 30-40% make up for EMI converts, and the remainder are transactors, those who pay their balances in full.

Gold is more than a loan

While home loans make for a lion’s share of personal loans, what is disconcerting is that gold, seen as a hedge against inflation and a hard asset in bad times, are being pledged at a rate never seen before. In eight years, loans against gold have surged from ₹25,000 crore to ₹2.94 lakh crore, at a meteoric CAGR of 42.3%, as Indians look to cash in on the surge in gold prices. According to the latest credit update by CRIF High Mark, the Indian arm of the Europe-based credit bureau and business information company, within gold loans, the more worrying late-stage stress (91–180 days overdue) is concentrated outside the ₹5 lakh-plus loan ticket sizes. The fact that the Indian middle class is leveraging as asset to build a liability, thinking that only a smaller portion of their asset is being pledged thanks to the rise in gold prices, is a telling sign of household finances in tatters. What was once pawned in crisis is now pledged in routine.

Ritesh Srivastava, founder of FREED, says the stress in unsecured debt is spiking up. FREED is a debt relief platform designed to help individuals struggling with unsecured debts through debt resolution programme by negotiating on behalf of the individual with the creditor concerned. “From monthly enrollments of ₹45-50 crore of stressed unsecured debt, our monthly run rate on the platform has hit ₹170 crore, including BNPL, personal loans, small ticket personal loans and credit cards. We expected the number to hit ₹250 crore by the year-end,” Srivastava tells Fortune India.

Owing a vehicle is still driving Indians with vehicle loans compounding at over 15%. Even there too the stress is building in two-wheelers, an indication of growing rural stress thanks to low food inflation hurting agri incomes. Within auto loans, NBFCs are seeing rising stress in later-stage buckets, according to CRIF. More two-wheeler borrowers are missing repayments, particularly on loans above ₹75,000. And the ₹75K–₹1L loan bracket has now become the dominant category, making up nearly 40% of all new loans issued.

Borrowing more and beyond

And then there is the quiet rise of “other personal loans”. A category that comprises loans beyond all that is shown in the graphic table. At over ₹15 lakh crore, the unspoken line between need and want, comprises this bucket.

Beyond the numbers published by the central bank, a look over the past annual reports of the country’s biggest life insurer shows that even insurance policies are being pledged to borrow at a faster clip.

The Life Insurance Corporation of India’s annual report for FY25 shows ₹1.28 lakh crore of loans against policies. Even the largest private life insurer has over ₹7,000 crore in loans against policies. Insurance is supposed to protect the family in dire times but is now “insuring” consumption.

Will GST cuts boost spending?

On the macro map, India looks healthy in one quadrant: mortgage debt is only 11% of GDP as per CLSA India, but swing the compass to non-mortgage debt, the needle spiks to 32% of GDP, that is a staggering statistic for an emerging economy with modest wage growth. “Nearly 70% of the personal loans issued are small tickets, below ₹25,000. And delinquency levels in this segment have reached 7-8%. The borrowers comprising this segment are the ones who are taking a loan of ₹25,000 to pay off another loan,” reveals Srivastava. Early-stage delinquencies (overdue by 31–90 days) is the highest for PSU banks in ₹1–2 lakh loans and ₹5 lakh+ loans basket, while for NBFCs the stress is in the sub-₹1 lakh loan segment.

In fact, according to CRIF, even in home loans, public-sector banks are seeing relatively high levels of borrowers missing payments in the 31–90 days overdue bucket. What’s worrying is that the repayment issues are mostly in smaller home loans below ₹35 lakh, and in this segment, PSU banks had the highest delinquency rates compared to other private banks and non-banks.

What does this indicate?

The great Indian Consumer has already spent tomorrow’s income today—every other form of borrowing is being tapped, stretched and strained. 

So, can the GST cut coax out more spending?

Theoretically, yes. But, in reality, it is too much to ask for a household—lready juggling EMIs, pawning gold and borrowing against life insurance—to find more appetite. Tax cuts make sense in economies where disposable income is elastic, but in India, disposable income is elastic only to the extent of credit limits!

To give credit where it’s due: the government has been doing the heavy-lifting for a while now, it has done its bit to boost investment and fuel consumption too. Not to mention the role of the central bank with an easy monetary policy.

The problem is corporate India has grown sharper and more opportunistic in recent years. After the deleveraging cycle, India Inc is sitting on a record cash pile, becoming far more selective about when and where to invest. While dividends and buybacks remain one way to keep shareholders happy, promoters, when it comes to personal wealth, are channeling capital into other businesses through family offices and related vehicles, chasing returns that look better than reinvesting in their own. Employees, at best, can expect an inflation-linked hike.

So, even as capital allocation is taking its time coming, the pain in the real economy is only expected to manifest in ways that’s going to be far from pleasant.

More than the GST cut, the government’s much-awaited MSME package will be the one to watch out for, which also is reportedly looking at direct income support to employees of tariff-impact sectors. “I suspect that this time around, MSME exposure will be the cause of pain for lenders,” says Srivastava. Against such a backdrop, any relief package will just ensure survival not a consumption splurge.

So, no matter how simplified the tax code is, a maxed-out consumer cannot spend more--not without a substantial rise in income, and robust job creation.